welcome! jeremy freese is a professor in sociology at northwestern university. he finds blogging to be a good diversion from insomnia and a far better use of time than television.

Friday, November 11, 2005

moment of liberal shame

I know that a lot of people are unhappy that the NYT has started requiring people to have subscriptions in order to read its columnists. For those of you who are Liberal Like Me but (unlike me) do not have a Times Select subscription, all I can say is that you are better off today for not being able to read Paul Krugman's column. It's about the Medicare prescription drug benefit, which is something I've come to know something about, and, wow, at least in my view it's really misleading. And misleading in ways that Krugman is definitely smart enough to know better, which makes it disingenuous.

Anyway, I'll reproduce the way he describes the drug benefit below:

Before we turn to the larger issue, let's look at how the Medicare drug benefit will work over the course of next year.

At first, the benefit will look like a normal insurance plan, with a deductible and co-payments.

But if your cumulative drug expenses reach $2,250, a very strange thing will happen: you'll suddenly be on your own. The Medicare benefit won't kick in again unless your costs reach $5,100. This gap in coverage has come to be known as the "doughnut hole." ...

One way to see the bizarre effect of this hole is to notice that if you are a retiree and spend $2,000 on drugs next year, Medicare will cover 66 percent of your expenses. But if you spend $5,000 - which means that you're much more likely to need help paying those expenses - Medicare will cover only 30 percent of your bills.

[...] The people who are actually likely to need a lot of help paying their drug expenses were deliberately offered a very poor benefit. According to a report issued along with the final version of the bill, people are prohibited from buying supplemental insurance to cover the doughnut hole to keep beneficiaries from becoming "insensitive to costs" - that is, buying too much medicine because they don't pay the price.

A more likely motive is that Congressional leaders didn't want a drug bill that really worked for middle-class retirees.

Don't get me wrong, I have much to argue with the prescription drug bill as well. In particular, I don't like the part where Medicare is legally prohibited from having any role in negotiating the price in drugs (and Krugman mentions this), which is basically a gift to the pharmaceuticals industry and also important to explaining the doughnut hole.

Because the doughnut hole can be so easily described in ways that make it seem strange, everybody seems to have fixed on it as though it was some kind of crazed (and, by Krugman's insinuation, deliberate) irrationality. While it's not the way I would designed things, the doughnut hole--and even prohibiting people from buying insurance to fill it--does make sense when you understand that the prescription drug benefit is really two separate benefits stapled together. It's really less an insurance program than a "discount" program for seniors with average drug costs, and then it is an actual "insurance" program for seniors with catastrophic drug costs. Part of the reason the "discount" program is needed is that, so long as you are going to make the program optional, you need to get these relatively healthy people to enroll in it to make the "insurance" part of the program an actual insurance program, as opposed to just something people sign up for when they know they are going to have huge drug expenses.

Anyway, nowhere in his column does Krugman mention that once you get past $5,100, the government picks up 95% of your drug costs. If you are going to say that the program provides a "very poor benefit" for those who need "a lot of help" with their drug costs, it seems dishonest not to mention this. It gets worse, and I don't have time to get into it, but Krugman knows full well that once the government legislated itself out of any capacity to control or negotiate prices, something had to be done to keep the response of drug companies (who, granted, helped a lot in writing the bill) from simply multiplying the price of their drugs in response to the benefit. Drug prices are the problem, not the doughnut hole.

I did the math for my present prescription costs and what I can expect to pay with the new Medicare plan.Costs are just about the same per year, with a lot more work for me.From experience, I expect benefits (less) and subscriber payments (higher) will change, along the lines of the HMOs once the insurance companies start to figure their profits.

I am admittedly not familiar with the legislative history of the Medicare drug benefit. But you'd better produce some to demonstrate that you are not providing an ex-post rationalization of a benefit "feature" actually designed to allow enough Republican arms to be twisted to get a piece-of-shit bill passed.

I hope I don't sound like a fan of the bill. I just think the real problem is caused by the government's refusal to use the vast power of Medicare to control/negotiate prices with companies, in combination with providing a program that is simultaneously optional and available to everyone. I also have arguments with how the plan is implemented via private insurers. But given those pathologies--which, yes, is a huge "given"--it's not plain to me that the doughnut hole is itself an independent pathology. Another way of saying this is that I'm not sure how I would reshape the benefit to plug it.

The way the hole may represent an independent pathology is that there was all sorts of budget trickery going on with the bill to give Republicans enough plausible deniability on its cost that they'd be willing to vote for it; the 'hole' could be seen as part of the cost containment mechanism there. Since raising the effective marginal price of the meds in the hole makes just about zero sense (for reasons Krugman mentions), it may have the force of Occam's Razor behind it, congressional findings or legislative history notwithstanding.

The fix here isn't rocket science. You -- not you personally, of course -- fill the hole by filling it, and pay for it partly by raising the revenue that the brave Republicans can't countenance raising, and partly by taking it out of the pockets of the bill's private sector beneficiaries (i.e., insurers and Big Pharma).

Or, much more radically for anything resembling the present political environment (but not a bad idea), you could take the Dean Baker approach of publicly funding pharmaceutical research and then selling drugs at roughly their marginal cost.

This is probably where we diverge. I'm all for raising the revenue that would plug the hole, so long as significant cost-sharing at modest price levels is maintained for people who can afford it (and of course preferably not for those who can't). But, I don't really think that is going to get anywhere without a more dramatic assault on drug prices, which I think can be done without being so dramatic as the Baker idea.

You know, I completely spaced the Big Pharma clause in your comment. It's not easy to be simultaneously debating an issue and trying to work on an unrelated paper in two windows at the same time. Sorry. Happily, though, it means we disagree less.

You have to remember that there actually are distributions of the population which would lead the doughnut hole to actually being the optimal policy. But clearly we don't live in that world. So plausible deniability also comes from congress-people having flawed knowledge (beliefs?) of the distribution of demand curves for drugs.

It's also worth noting that the Health Affairs article that Krugman cites runs a simulation and finds that the revenue neutral co-insurance rate is about 56 percent.

There is an interesting footnote that points out that "high spenders also have above-average incomes, which might justify some of the differential in out-of-pocket payments between low and high spenders." And from the Rand Health Insurance Experiment we know that the only people whose health is hurt by having really high co-pays are poor folks. So if it is already only more affluent people who are buying lots of drugs (and thus hit the doughnut hole), then this is actually just redistribution from the top to the bottom. Though it does say interesting -- and not surprising -- things about the health care system that more affluent people use more drugs.

A fact or two which Krugman leaves out about the Medicare drug coverage: -- If you don't want a doughnut hole, you don't have to have it. > In every area, there are plans which cover drugs in that coverage > gap. > > -- There are also plans offering no deductible. > > -- The original estimate of premium was $37. Then it went down to > $32. In every state but Alaska, you can get coverage for less than > $20. And in many states, there are plans for less than $10 month. > > -- When the Medicare bill became law, people said no companies would compete for the Medicare drug coverage. That has turned out not to be true, and the competitive marketplace has helped drive down costs for taxpayers and those in Medicare.

I can get 'catastrophic' coverage right now — but that option seems about to disappear. I'm sorry the administration won't build their plan within Medicare and Medex options.

But Anon 9:49 wonders why the 'really?' Why not?

I know that where you are in Cambridge the generations meld together very well. Ideas, interests, common personality traits bring them together and real friendships form. I hope you are enjoying such exchanges and getting the added benefit of their real-life experiences.

'Characteristic detached logicality that is maddening'? If I add blurbs to the top of my blog the way some other bloggers (e.g., Althouse) do, I'm going to add that one. I could argue with the characterization, but, in honesty, that's me-to-a-T.

No, see, my gimmick would be that my blurbs would actually be criticisms of me. And not the "criticisms" that I've seen a couple other people put on their blogs, which are intendly wildly untrue, but criticisms of me that I think are have some validity.

It's something I need to think about more and wish I had the chance to articulate my thoughts about more. Your opinion on these matters (especially of course anything regarding prices) a lot for my own thinking.

I'm hope you took "smackdown" as the intended cacophemism. So far, I've been frustrated by a lack of serious discussion of possible rationales for the coverage hole in the sources I've seen so far. I'm provisionally convinced it's main purpose is to contain officially scored program costs. Apart from what the hole does to the observed marginal price, the implementation seems to undermine the social insurance aspect of the program in major ways (and today's column is a pretty good 750 words on the economics).

Re Paul Noonan's comment, of the 50-some plans available in Wisconsin, only one offers coverage of brand-name drugs in the hole, and it charges a $58 monthly premium and a $30 copay for brand-name formulary drugs.